Why Every Tech Company — Large and Small — Needs a China Strategy

By Geoff Yang

Everyone knows that China is a complex place for U.S. companies to do business. From the obvious cultural and language differences to the regulatory landscape to the sometimes unpredictable political climate, it can be a country where even the most experienced entrepreneurs and executives stumble. Nonetheless, it is an increasingly vital component of any company’s long-term strategic plan, particularly when it comes to tech.

That is why Redpoint recently hosted a gathering of our founders and CEOs to talk all things China. Our firm has been active there for more than a decade, investing in excess of 30 China-based startups, including such standouts as Qihoo 360, iDreamSky, and APUS. With offices in Beijing and Shanghai, Redpoint is an established, well-networked presence on the native tech scene. More than that, we have friends who know what it takes to be a winner in China. We invited two of them — Tao Li, a former Qihoo 360 executive who is now CEO of APUS, and Jim Wilkinson, Alibaba’s Head of International Corporate Affairs — to share their perspectives.

Most global tech companies already understand the importance of China. But startups often misunderstand that many of the same economic drivers apply to them as well. They believe that because they are small or just getting to market, they don’t yet need to consider the China question. This kind of thinking is short-sighted. Why? It comes down to the three Cs: Cash, Customers, and Competition.

Cash

China is awash in cash and anxious to invest it. Tech giants like Alibaba, Baidu, Tencent and others are investing in homegrown and international startups like never before. In fact, the number of venture-backed technology companies coming out of China has increased six-fold in just four years. “Every U.S. company needs to have a strategy to get money from China,” explains David Yuan, the partner heading up Redpoint China. “It is increasingly a funding source. This is a way for Chinese companies to learn and penetrate the market.”

This spending spree is in part due to a maturing local venture capital community as well as the emergence of big global brands and platforms like Alibaba in China. One-third of the top 20 Internet companies as measured by market cap are China-based. They are looking to deploy capital in ways that can increase their reach both domestically and internationally. Wilkinson says Alibaba, for instance, “will look at anything to attract more people to its platform or improve the user experience.” That, he says, translates into opportunities for innovators with disruptive technologies as well as companies selling goods and services that China’s massive population wants. That’s why Alibaba in 2014 alone pumped cash into a wide array of startups, from Lyft to FirstDibs to Tango. This investing trend is likely to accelerate and include outright acquisitions, some of which will be very high profile companies.

Customers

Whether on the consumer or enterprise side, China represents an endless stream of possible customers. The numbers tell the story — 700 million internet users, more than 300 million online shoppers, 520 million smart phone users — just to name a few. It is virtually impossible to ignore such a gargantuan market, which is why companies of all shapes and sizes are teaming up with China’s behemoths to bring American goods to Chinese consumers. Even giants like Amazon, which just announced the opening of a storefront on Alibaba’s Tmall.com, understand the importance of partnership. “Companies can go through Alibaba to get to the China market,” explains Wilkinson.

In fact, going through Alibaba or other native platforms may be the only way for U.S. consumer companies to reach China’s population. While seemingly more open than it was even five years ago, China remains a country governed by a strong nationalist interest, which often shows itself through protectionist policies. The Chinese government is actively discouraging local companies from buying American products and services due to security concerns as well as a basic philosophy that all key markets should be dominated by homegrown companies.

Both Wilkinson and APUS’ Li caution anyone looking to do business in China or with Chinese companies to first understand the rules of the game. Wilkinson says most people’s notions about China are outdated. He advises companies to visit multiple times to educate themselves before doing deals. That means not just understanding the business climate but also the political and regulatory climates as well. Even better, says Wilkinson, is finding a Chinese entity to guide you. “It’s very hard to go it alone,” cautions Wilkinson. “You need a partner.”

Putting in the effort is more than worth it, says Li. Significant opportunities are still available in China, particularly for those focused on the enterprise space. That market, says Li, is only now developing as China looks to the U.S. and elsewhere for the next waves of innovation. Smart young companies can and should take advantage while China’s tech and business community still welcomes their ingenuity and next-generation insights. “At the entrepreneurial level, you can do well in China,” explains Li, noting that won’t always be the case as China continues to move up the learning curve.

Competition

While China can be a potent partner, it is also a ferocious competitor. The local tech scene, once content to copy successful U.S. business models, is now able to innovate and develop in ways that rival the U.S. like no other country can. Indeed, China has the talent, resources, and ambition to match and in some cases outdo Silicon Valley on the global stage. Look no further than Li’s APUS for proof. In just six months, the company, known as a launcher for Android, has more than 100 million users — almost all of whom are outside of China.

To some, China’s broadening influence may seem threatening. But smart entrepreneurs should instead view it as an opportunity, particularly in the U.S., a market that is coveted by Chinese tech companies. “Chinese companies want legitimacy on the global stage,” explains Wilkinson. “They crave it from the financial centers in the U.S. So working with U.S. companies is like they’ve made it.” Adds Li: “Most Chinese companies want to be in the U.S. but they are not ready.”

That is because just as Americans struggle to understand the ins and outs of the Chinese market, the Chinese have the same problems when it comes to entering the U.S. They need — and are actively looking for — American partners to help pave the way. Li says it’s important to take advantage of this educational period now. China will only need our help for so long, he says.

Beyond the U.S., China’s interest in other countries, from Brazil to Indonesia to Russia, can yield more possibilities for startups. Li says Chinese companies are globally focused and looking to build products and provide services for U.S. startups with breakthrough technologies. “China will be a bridge into other big markets,” says Li.

This is all good news for Silicon Valley and U.S. tech companies in general. Done smartly, companies in the U.S. and China, both large and small, can find ways to help one another. Redpoint is seeing that every day and remains committed to working with the only other country in the world with a self-sufficient ecosystem devoted to finding and bringing to market the next great innovations.